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Should you consider buying silver this Diwali? - Outside View by PersonalFN

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Should you consider buying silver this Diwali?
Oct 13, 2014

It's a festive season. People shop around and try to get best deals. Nowadays online retailers have been offering consumer goods at throwaway prices. You might have failed to understand how they are able to offer smartphones and tabs at unbelievably low prices. It is rare that you get discount much beyond your expectation. It may be a move to capture greater market share and may not be a profitable trade for them. But the moment you get something cheaper than your expectation, you may turn skeptical about its quality. The same is true with a few assets. Take example of equity. If shares of a company keep falling continuously, you would refrain from buying thinking that there is something wrong with the company that you don't know. Even so, there are exceptions to this. If somebody offers you gold at a discount there won't be any such dilemma.

So, are you being offered a precious metal like gold at a discount? It is unlikely. It is almost impossible for you to bargain on gold and silver prices, but it is still possible for you to buy precious metals intelligently.

No. You are wrong if you thought PersonalFN is asking you to speculate on prices. Rather, PersonalFN has always believed that speculation in any form could prove to be bad for your portfolio. However, there are some indicators that send out strong signals which you shouldn't ignore as they might come handy. What PersonalFN means by this is, sometimes it is more beneficial to buy silver than gold.

Do you always prefer 'Gold'?

It is possible that you might buy gold and ignore silver. Let's not forget silver is known as "poor man's gold". Like gold, silver is also a store of value. It is less precious than gold but is considered superior to base metals.

A few facts about silver...

Usually, silver tracks gold as far as price direction is concerned. When gold advances, it is most likely that silver too would rise, but reverse cannot be ruled out. Gold prices have a negative co-relation with the US dollar. In other words, silver can also give you some sort of portfolio diversification. However, the level of rise or fall in silver prices as compared to gold may vary from time to time. This is primarily because fundamentals of gold and silver differ considerably. There has been instance where gold appreciated by only 5% over a quarter, while silver has advanced by around 15% over similar time frame.

Gold to silver ratio may help you judge the price strength of both assets. Suppose gold prices are down and silver prices are also depressed, gold to silver ratio may tell you which asset may generate better returns when precious metals start gaining strength.

Would Silver outperform?
Data as on October 01, 2014
Note: Prices of 10 grams of gold are compared with those of a 1 Kg. of silver
(Ace MF, PersonalFN Research)

As depicted in the graph above, gold to silver ratio fell drastically in April 2011. In the April 2011, prices of silver shot up to Rs 74,000 per Kg. while gold prices were little under Rs 22,000 per 10 grams. This was a time when silver was overheated and gold was undervalued in comparison. By September 2011, gold jumped to Rs 28,000 per 10 grams and silver fell below Rs 65,000 a Kg.

If you go even backwards, gold to silver ratio was high in December 2009. Gold was trading around Rs 17,000 mark while silver hovered at about 28,000 levels. Came November 2010, silver zoomed past Rs 40,000 per Kg but gold struggled at around 20,000 per 10 grams. This suggests that when gold to silver ratio is high it is likely that silver will outperform gold when precious metals rebound.

Currently, gold to silver ratio stands close to a 5-year high.

Current scenario

At present, gold is under pressure as Federal Reserve (Fed) in the U.S. has been withdrawing monetary stimulus in a phased manner. There is also a possibility that Fed may hike interest rates in 2015. Given this, U.S. dollar has been gaining strength against some major currencies of the world. Strong dollar is pushing gold prices down. This doesn't necessarily mean silver prices will fall more. Silver has more industrial applications as compared to those of gold. Almost 2/3rd of demand for silver comes from industry. Electronic industries account for nearly 1/5th of demand. Therefore, unless industrial demand cools, monetary policy decisions of developed nations may not have the same impact on silver as that on the gold.

Purely going by gold to silver ratio, it seems, silver is likely to outperform gold in the intermediate future. PersonalFN is of the view that, you may invest in silver provided you have high risk appetite. Having said this, it is noteworthy that, options for investing in silver are limited in India. Unlike Gold Exchange Traded Funds (ETFs), there are no silver dedicated ETFs in India. This makes you heavily dependable on physical market for silver. If you are buying silver in physical form, you need to ensure that there are no doubts about the purity of silver.

PersonalFN also believes you shouldn't bet on silver futures as they may prove to be risky. It may even result in loss of your capital. More conservative investors should invest 10% to 15% of their portfolio in gold.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund Research Firm known for offering unbiased and honest opinion on investing.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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